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Poor practices drive contract under-performance

Procurement, legal compliance, accounting, marketing … These are all necessary activities within a business. The problem comes when those activities become enshrined within rigid policies and practices which are not well aligned and then undermine business goals and performance.

A recent report from Deloitte illustrates this point perfectly. It is just the latest in a number of audit reports that highlight how procurement practices damage economic results, frequently overwhelming the declared ‘savings’ that are generated by today’s Procurement functions. Yet when you review the causes identified by the study, most Procurement groups would deny responsibility: the problems are associated with poorly defined objectives, unbalanced allocations of risk …. ‘Not my job’ will be the reply. ‘That’s because of senior management, engineers, lawyers ….’. And in fairness, they are right – because the real problem is that process responsibilities are not aligned and the business lacks holistic insight.

This immediately illustrates the point that we must distinguish competency to perform a task from the assumption that it will then be achieved by a specialist business function. Firstly, the job title frequently does not reflect the span of responsibility. Secondly, there is a very real danger that the specialists become a barrier to good performance because their practices become sacrosanct, rather than the quality of their output.

Output is often hard to define and measure. You need to find critical indicators. That is why IACCM promotes the idea of measuring contract performance. Contracts are, after all, tangible assets – far more so than the sales revenue forecasts or procurement savings that are such a focus today. Smart organizations take these predictions of contract performance and monitor the actual results. More importantly, they explore and analyze the reasons behind performance gaps.

Contracts represent an overall measure of business effectiveness since every activity within the business contributes to them. If looked at through the lens of the contract, almost any shortcoming – or success – can be tracked back to its origin. This analysis, when the results are considered, quickly starts to reveal the practices and processes that are out of step with business needs – or which should be promoted to ensure success.

Increasingly, analyses are pointing to issues like insufficient stakeholder engagement, selection of the wrong supplier, use of the wrong incentives, inappropriate allocations of risk, over-commitment of resources …. All of these are readily evident from analysis of contracts that fail or underperform. Yet rarely are such analyses undertaken. Why? Ironically because contracting is one area where there is rarely a defined process and even more rarely any point of accountability for overall performance. While individual contracts may have ‘owners’, these unfortunate people typically do not receive substantive guidance or support. Indeed, the contract they are handed is frequently flawed from the outset due to the various policies and practices that governed its construction .

‘Commercial excellence’ is a term that every business leader should adopt. They should see this in terms of whether their organization’s contracts are delivering intended results. They should be demanding insights to the causes of under or over-performance. Essentially, business leaders need a small team that undertakes forensic analysis into business policies and practices as they relate to performance on contracts. Their key target should be to drive incremental revenues and cost reduction through improved performance of the contract portfolio.

Is empathy a key commercial instinct?

You don’t have to search far to discover all that is being written about increased complexity in today’s business world. At the top of the list come issues such as managing interconnections and interdependencies – many of which cross traditional boundaries of language, culture and commercial norms. Networked technologies and social media mean that we cannot any longer ignore diverse stakeholder opinions. Old assumptions that power will prevail are no longer true – so is empathy the new source of strength?

Last week I attended a conference run by the Wharton School in Philadelphia. Its focus was on megaprojects – and this name alone conjures up an image of complexity. Time and again, presenters emphasized the importance of stakeholder management and engagement. We discussed the many challenges of understanding and reconciling diverse perspectives, especially since most megaprojects  are focused on infrastructure development, which is often contentious. Developing mines or oilfields, building rail networks, roads, power stations … these are the types of initiatives that seem good in concept, but may meet violent opposition from local communities, environmentalists, religious groups or political opposition.

If we fail to address those stakeholders, our project is at risk. Modern media means that no voice goes unheard. Campaigns can arise from the smallest beginnings.

While it may not be possible to address every stakeholder’s wishes, we can – and must – bring them to a point of reconciliation and acceptance. And I would argue that this goes to the heart of good commercial and contract management. The job of a commercial / contract manager should be to avoid disputes – and to do this, they have to understand diverse perspectives and anticipate likely reactions, both within and outside their organization. Such considerations are already having major impact on contract and negotiation practices. For example, the growth of local content or offset arrangements are no longer simply about keeping Governments happy, they are increasingly focused on bringing direct benefits to affected communities. In addition, there is growing need to consider not just the impact of the construction itself, but also the entire aftermath of commissioning or decommissioning – people want to know these things in advance. And even when it comes to negotiating or contracting with local communities, there are many lessons to be learned. One speaker explained how they provided a community with negotiation training so they would be equipped to have effective discussions on the issues to be resolved. Another spoke about the need to have highly adaptive approaches to contract content, wording and terms – for many markets, large corporate contracts appear very threatening and undermine trust. They also contain many terms or assumptions that simply cannot work – such as the need to link to an ERP system or to take substantial insurance.

Good contracts and commercial relationships have always depended on a readiness to listen and understand the perspectives of others. I think this used to be a skill that many contracts, commercial and legal staff possessed. Unfortunately, the imposition of rules, standards and compliance have transformed the discipline to one of imposition, rather than understanding. And this regularly undermines the value we can offer. It is time for commercial staff to develop their skills in empathy. And then we would be welcome members of every project team.

Contracts and technology

Technology has reshaped business capabilities and business relationships on a global scale. Yet somehow, the process and instruments through which those capabilities are expressed and by which those relationships are managed (that is, contracts) have largely managed to escape untouched.

The lawyers and contract managers responsible for contracting have (mostly) accepted the need to use email and some are very proficient with a variety of applications; many companies have implemented some rudimentary contract management software, though rarely is it enterprise wide and in most cases it covers elements of the process only. For example, the most recent IACCM benchmark data tells us that 77% of respondents have a repository. But that drops to only 52% who use software to support internal review and approval and other functionality falls away rapidly.

Much of this seems to be because senior management fails to take contracting seriously. It does not understand the cost to the business of the inefficiencies and value erosion associated with a fragmented approach to contracting. In most organizations, contracting remains activity- based, spread across multiple stakeholders, lacking clear authority and ownership. In such a situation, it is enormously difficult to build consensus for a solution, let alone gain funding.

But unfortunately, those within legal and contracts functions who could be leading the charge for new and better approaches in general do not do so. In some cases they may be technophobes; in others they lack confidence in the available technologies; and some who should be leaders simply do not lead.

Contract management technology should be transforming the way that the world does business. And before long, I am convinced we will see a true revolution, where software is not simply about raising internal efficiency, but is about creating more sustainable and higher-yielding relationships. Already a few encouraging signs are emerging. Two recent examples are of a system that oversees performance management – at a shared level, with both parties having direct access. This has resulted in a strengthened relationship and revenue growth for the supplier. Another is around the use of artificial intelligence that can remove the pain of dealing with individually negotiated agreements.

I am convinced that we will soon grasp the point that contract management software is not an extension of ERP – it is the application that helps business overcome the fundamental weakness of ERP in enabling or managing external relationships. And I also believe that advanced systems will drive us to adopt more industry standard agreements that avoid the time-wasting battle of the forms. Negotiation will be focused on true value trade-offs and this will be supported by powerful analytics. The contract management or legal group of the future will be targeted towards revenue and profit maximization through intelligent term selection.

And the technology that delivers this really will be something worth having!

Is ‘sustainability’ a good term?

In speaking with groups around the world, I find a degree of confusion over use of the term ‘sustainability’ when applied to trading relationships.

Increasingly, for specialists in the field of compliance, the term is used to refer to a range of environmental and ethical issues. it therefore tends to apply to the standards and behavior of suppliers or supply networks and whether or not they demonstrate ‘sustainable’ practices.

For many others, the term is used in the more traditional and rather broader sense of whether a relationship is sustainable – i.e. does it have a long-term future? in this context, it has mutual application and relates not only to issues of behavior, but also to questions of policy or strategy. This group often gives limited thought to the compliance issues that are fundamental to the emerging supply management specialists.

Does this matter? perhaps not, but it always seems unfortunate when the words we use create confusion and add to potential for misunderstanding. if we always have to define the context in which we are using a word, it makes its use somewhat inefficient and redundant. Perhaps we just need to think of qualifying terms – for example, to distinguish sustainable practices from sustainable relationships.

Contracting: the core of business competence

Winning contracts, placing contracts with suppliers, executing on contracts – the ability to undertake these activities successfully lies at the heart of any sustainable organization. Shifting business models are making capabilities in these areas ever more critical.

Yet for the majority of organizations, contracting remains one of the few undefined business processes and probably the least automated.

For most businesses, the ability to win contracts with customers has always been important. The significance of contracting with suppliers continues to grow, as a higher proportion of revenue is spent on external supply (in some industries, as much as 80%). But this is only part of the story because steadily, the role and importance of contracts has increased and the complexity of performance has also grown.

In the past, executive surveys revealed that most CEOs saw little importance in contracts except for their symbolic value in winning business. The exception to this was if they perceived significant risk or uncertainty. Today, risks and uncertainties abound – ranging from a myriad of regulations, through increasing internationalism in trade, into contracts that often commit to long-term outputs or outcomes. For many, gone are the days of simple commodity supply; the contracting process has become critical to addressing a wide array of business risks – financial, legal, regulatory and performance.

Yet old habits die hard and many organizations continue to operate with highly fragmented commitment processes, with ‘the contract’ viewed as a legal or administrative output. As a result, relationships often suffer from the wrong form of agreement, inappropriate terms and conditions and poor management of performance and governance standards. As IACCM research demonstrates, good contracts offer a framework for successful relationships and provide structure for subsequent performance.

There has been almost endless investment in defining and automating internal business processes and structures. In many cases, this has actually been at the expense of the external relationships on which organizations rely. It is time for executive management to shift focus from internal operations onto external effectiveness and the integration with trading partners. The contracting process offers the route to this integration, through insights to market needs and value as well as actual performance standards and capabilities.

When regulation becomes political

Flag_of_the_People's_Republic_of_China_svgIt might be argued that all regulation is ultimately political, but notices issued by the Chinese Banking Regulatory Commission and the Ministry of Industry and Information Technology appear to cross new boundaries. They threaten operations in China by all foreign banks, undermine competition in the technology sector and show complete disregard for the intellectual property rights of non-Chinese software companies.

In common with most jurisdictions, China has concerns over cyber-security and wishes to ensure effective oversight of the banking sector. However, the authorities appear to be making this into an opportunity to either eliminate competition or to acquire trade secrets via access to source code and encryption keys. Presumably such access would also enable the Chinese government to mount cyber attacks of its own against foreign countries.

Speaking with representatives of the banking industry, there is of course massive concern. One executive explained to me that the regulations as currently published would leave banks with two options. One would be to leave the Chinese market and the other would be to create a unique entity, using only Chinese origin software and technology. The problem with the latter solution – in addition to the expense – is that such an operation would then prevent the bank from meeting regulatory obligations elsewhere, since it would no longer have integrated visibility into worldwide operations.

It is hard to know what goals the Chinese authorities are pursuing. Is their intent to eliminate domestic competition in financial services? Do they really believe that non-Chinese institutions will obtain and hand over source code (which they of course do not have and which would leave them in breach of license terms) which will then be used to enable Chinese firms to replicate and undercut foreign rivals? Or is this simply posturing and a negotiating ploy that leads to some other goal?

This incident reveals the hidden danger of regulation. The more we have, the more that Governments will be tempted to use it for domestic policy and political purposes. In a networked world, it becomes very easy for authorities to justify their actions on the basis of ‘national security'; sadly, we must anticipate a growing threat to world trade driven by many forms of protectionism, of which this example is just one.


Is sustainability affordable?

“There is a profound shift going on”, according to John Elkington, Executive Chairman of Volans.

John was my co-presenter at the Ecovadis conference in Paris, discussing the progress and challenges of sustainability. The size and quality of the audience at this event, together with the growth being experienced by Ecovadis, are clear illustrations that sustainability is very much on the business agenda.

In my presentation, I highlighted the point that reputation is now of massive importance to boards and executive management. Indeed, recent CEO studies emphasize this point, with a survey in the Financial Times revealing that ‘honesty and integrity’ are now top of the CEO agenda. So if market perceptions matter so much, it is clear that there needs to be greater focus on ensuring the right relationships and the right suppliers. Organizations are growing increasingly dependent on their supply network – many now spend 70% or more of their revenue on external supply. So ensuring the integrity of supplier behavior is no longer optional – it is essential.

Several speakers illustrated this point, outlining how top corporations like Nestle, Nokia, Societe Generale and L’Oreal are embedding sustainability principles into the way they do business. They have moved beyond simple codes of conduct with steps that include:

– significant weighting is given to each supplier’s ethical behavior within the selection process

– individual buyers are measured and rewarded on their sustainability performance

– the frequency and rigor of supplier audits is increasing, with remedial steps identified and agreed

– sustainability issues now form part of the contract, with direct consequences for failure (including immediate termination)

These steps indicate that health and safety, remuneration policies, working conditions, compliance with environmental laws and regulations are all being take seriously.

Challenges remain. Among them, the question of how widespread ‘good practice’ actually is. And when it comes to increased costs, are companies willing to trade off savings for sustainability? Based on the CEO surveys, I think the answer increasingly is yes – executives understand that a failure to observe sustainable practices carries a very real cost.



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